Option Consideration & Banks - Posted by Jim

Posted by jullio on February 28, 2001 at 09:00:36:

Goodnight Rookie, Goodnight Shaun boy, Goodnight jullio.

Option Consideration & Banks - Posted by Jim

Posted by Jim on February 24, 2001 at 13:46:19:

We collect upfront option consideration from our tenant / buyer.

I know we let them know that it is “Non Refundable” but what do we call it? Is it an amount that we apply to the end sales price of the house or what?

When they go for new financing from a lender and they ask for a down payment how is this handled?

Are they just getting a loan for $95,000.00 and need to put down more cash as a down, or do we somehow tell the lender that they have placed $5,000.00 down to us in a lease option agreement?

Please help clear the smoke on this one.

Thank You

Jim

Re: Option Consideration & Banks - Posted by Jim IL

Posted by Jim IL on February 25, 2001 at 20:40:01:

Jim,
Rather than get involved in the argument below, and decipher what exactly these two are saying, I’ll just tell you how I do it now, have done it, and will continue to do it, because it works.
So, lets see what you said and try to answer it in order, based on what I do in my own experience.
You said;
"We collect upfront option consideration from our tenant / buyer."
A: Was this a question?, if so, the answer is “YES!” We collect option money UPFRONT. ALWAYS get something.

Q:“I know we let them know that it is “Non Refundable” but what do we call it?”

A: I call it “option money” when speaking, and then refer to it in the option agreement as "NON-refundable option consideration."
I place that on the line where that dollar amount is entered on the price break down of the option agreement.
It clearly states that this amount is NON-refundable, and only gets applied to the price IF the option is exercised.
I also place a line about that in the “Other clauses” section of my agreement. I print them all out BOLD and in CAPS to stand out.
I read this to the buyers as they sign, and make sure they UNDERSTAND it FULLY!
99% of them say, "Well, that will not be a problem, because we intend to buy the home."
And I hope they do, but if not, the non refund part is covered in writing.

Q:“Is it an amount that we apply to the end sales price of the house or what?”

A: This really depends on how the lender they go to for a loan interprets it. Some will look at it as “Down payment”, and others look at it as reducing the sales price.
If one will require the T/B’er to come up with more downpayment money than they have, and use the option money to reduce the price, just find another lender for them.
or
Restructure it when they exercise to conform to that lenders criteria, carry a second, re write the agreement as a land contract, or whatever needs to be done.
Just remember, the burden to exercise is on the buyer, not you. If they cannot, you simply get a new buyer who can.

Q:“When they go for new financing from a lender and they ask for a down payment how is this handled?”

A: Answered above I hope. All lenders are different. Find a broker who works with several and understands what you are doing. They do exist, I have a couple I work with that are local.

Q:“Are they just getting a loan for $95,000.00 and need to put down more cash as a down, or do we somehow tell the lender that they have placed $5,000.00 down to us in a lease option agreement?”

A: This should be all spelled out in the agreements with the tenant/buyer. You should not have to tell the broker/lender anything, it is all right there in writing. You may have to explain it to them if they do not understand, but that is easy enough. And if they do not understand, time to get a new nroker.

Hope this helps,
Jim IL

Re: Option Consideration-Whose Correct? - Posted by Shaun

Posted by Shaun on February 25, 2001 at 17:51:36:

Ed. you are correct. You, yourself have the right to be incorrect, and you are. You are not seeing the trees for the forest! The man is very clear in what he wanted. He wanted to know what to call it and what to tell the loan institution. Every Guru we have seen who authors a course on L/Os says the same thing. It is creditable, or can be applied to the purchase. Ask Bronchick or Kiser. You took it out of context and applied a strick mortgage brokers interpretation to it. Lighten up, don’t be so stubborn, help the guy out. Perhaps you should leave the L/O interpretations to the Gurus and people who do them. But your great on financing anyway!! Your’e a peach Ed, but you have a hard time admitting you might be wrong?

Thank You! “Everyone” - Posted by Jim

Posted by Jim on February 25, 2001 at 15:08:39:

Thanks a whole bunch for your answers… and answers from all angles I might add. You all supplied me with the answers I needed as well as answers from the other side!!

You are all correct depending on where your looking at this from, and I am happy to say that I am enlightened on every angle of it now!!

Thanks Again for all your help and support! …You’ve all been very helpful!!

Jim

I disagree with Ed… - Posted by TRandle

Posted by TRandle on February 24, 2001 at 22:50:25:

Jim,
I use Bronchick’s forms for many of my transactions. The documents state that the option consideration is non-refundable if not exercised and is applied toward the purchase price if the optionee does exercise.

How the lender treats the option consideration is lender-specific. I have yet to actually have someone purchase, but I’m told some lenders will allow it toward the down and others take it off the sales price.

And Ed’s comment about it not being non-refundable is off the mark as well, at least here in Texas. The standard Texas Real Estate Contract (TREC) is essentially an option contract now. It specifically states that for $X amount the buyer can back out within blank days for any reason. It also offers the choice of having those funds applied to the purchase price or not, if they do buy. Hope that helps…

Re: Option Consideration & Banks - Posted by Shaun

Posted by Shaun on February 24, 2001 at 14:38:36:

If you option ammount is credited or used as a down payment on the house if the option is exercised, and your option document states that, then there should be no reason that it wiil not work as a down payment or partial when the buyer obtains a loan. That is what it becomes, a down amount.

Re: Well, - Posted by Ed Copp (OH)

Posted by Ed Copp (OH) on February 24, 2001 at 14:01:23:

If it is option consideration then it is not part of the sales price (if the sale even takes place). It is consideration (payment) for the option, that’s it.

If it is non-refundable that means you will not refund it, nobody gets thier money back. Has nothing to do with the sales price. There has not been a sale (of the property) yet.

I hate to make assumptions but of the numbers you posted the total is $100,000 so I will (since there is no other choice) assume that the proposed selling price will be $100,000. The fact that there is an option has nothing to do with the sale since the option consideration is not refundable. The purchase of the option (which is over and done with) has nothing to do, dollarwise; with the purchase of the property.

Now IF the option is excersised, then there will be a purchase of the property, and yes the prospective buyer will have to come up with a down payment to get financing. They will be starting the purchase from scratch.

Re: You are permitted to disagree - Posted by Ed Copp (OH)

Posted by Ed Copp (OH) on February 25, 2001 at 11:20:56:

even if YOU are incorrect.

Re: I stand on my answer. - Posted by Ed Copp (OH)

Posted by Ed Copp (OH) on February 25, 2001 at 11:13:29:

YOU have just added several paragraphs of verbage to the original question which, IF IT WERE INCLUDED IN THE ORIGINAL QUESTION; would have changed the answer…BUT it was not there.

Option consideration IS payment for the option, and nothing else.

Non-Refundable, means it will not be refunded.

If you would like to change the original proposal, Well that would be a counter offer, not a contract.

Having answered the ORIGINAL question, correctly I might add; I stand by my answer. I had no way to know what ADD ON’S might be in your head…

Re: I disagree with Ed… Mistake Ed? - Posted by Shaun

Posted by Shaun on February 25, 2001 at 08:39:08:

We may be splitting hairs here, credit towards, or applied to, but almost all L/O courses we have seen Bronchik’s Kiser’s and LeGrand’s use these words and operate on the premise that the Option amount has the benefit to be used against the purchase price. It is also an advantage and prime selling point to the ultimate buyer and he can use as his down payment or part of it. We have used it for L/Os and applied it as down payment when the buyer obtained a loan, by just verifying to the Mortgage company that the buyer has made a down payent of that amount and showing it as such in the sales contract. If this cannot be done for some reason, then a lot of L/Oers need to know about it. How about it Legal Beagles? - Bronchik? Mortgage Experts?- Ed?

Re: If the option - Posted by Ed Copp (OH)

Posted by Ed Copp (OH) on February 24, 2001 at 17:31:28:

amount is credited, then in essence it is being refunded; so it cannot be non-refundable. This is a conflict of the terms used. Contract language needs to be specific, that is to say that we need to do what is stated in the contract.

If a contract cannot be understood (easily), and a case goes before a judge; guess who will loose?

Re: Well, - Posted by Surfdog

Posted by Surfdog on February 24, 2001 at 16:03:34:

Ed-What do you think about this: if the T.B is ready to exercise, convert the L/O to a L/C (so the prop can be treated as a refi, with the attendant better cash freeing LTV & terms)?

Thank You Ed. - Posted by Jim

Posted by Jim on February 24, 2001 at 14:09:43:

Thanks Ed!

Your post explained it clearly.

The numbers I used were for example only.

Just a fictitious figure to use for explanation of the answer.

Thanks Again

Jim

perhaps it’s interpretation… - Posted by TRandle

Posted by TRandle on February 25, 2001 at 12:32:56:

Ed,
I’ve re-read the various posts and my answer still seems accurate to me. You did not allow for the possibility that the option consideration could be applied toward the purchase per the contract. You also stated that the buyer would be starting from scratch, but this depends on the lender’s criteria and how the contract is written. To me, your response did not accurately address the question posed, which I took to be a “typical” L/O scenario. Jim was looking for information to give potential T/Bers, and your response was NOT accurate per my method of doing L/O’s. If it’s important, you can be “correct” for the record, but I thought it was important that Jim receive an alternative viewpoint. Take care.

Re: No mistake here - Posted by Ed Copp (OH)

Posted by Ed Copp (OH) on February 25, 2001 at 11:32:32:

Your commentary as well as that of T Randle addresses something that was not in the original question. If I remember corretly, and I do; the original question was confined to the use of terms, not pepole or what people teach.

Non refundable means it will not be refunded.

Option consideration is payment for the option, nothing more.

Banks were also mentioned. Be sure that they will not “see” anything in a contract that is not written there. The banker may not have taken any L/O courses and thus must depend on what is written or stated, not what is in the mind of someone. In other words the banker will “see” what is written down rather than what you think it should say.

You have a right to be incorrect that is what this board is all about.

Re: Well, - Posted by Randy Joiner

Posted by Randy Joiner on February 24, 2001 at 20:22:30:

T.B. = Tenant Buyer
L/O = Lease/Option
L/C = ??

Help me out please…and Thank you!

Re: Very good idea (NT) - Posted by Ed Copp (OH)

Posted by Ed Copp (OH) on February 24, 2001 at 17:21:53:

Re: What’s so difficult? - Posted by Ed Copp (OH)

Posted by Ed Copp (OH) on February 25, 2001 at 18:27:05:

Non means NO.

Non refundable, means NO REFUND.

What part of NO don’t YOU understand?

Re: I Agree With Ed…Here’s Why… - Posted by Houserookie

Posted by Houserookie on February 25, 2001 at 23:42:38:

Although I don’t handle many L/Os, I have done many
purchase options.

A lease option is in essense two agreements in one.
The first is a lease/rental agreement.

The second is an option to buy property. The option consideration can be $1 or whatever dollar amount.

From a legal perspective, there is no requirement by law to refund, credit, the option fee.

Seller however can choose to credit the t/b towards to purchase price.

Seller can also opt to pay t/b X dollar amount to fix and/or maintain property if/when purchased.